Accounting Business Reporting for Decision Making

580 Accounting: Business Reporting for Decision Making

It may encourage the premature disposal of assets to ensure that the latest equipment is being used to

earn the profit; that is, equipment might be replaced before it should be.

Using the market value rather than book value means that the investment base is being valued on

current costs rather than historical costs. (Note that both written-down value and original cost are his-

torical costs.) The advantage of this method is that the derived profit is based on current prices and costs,

so the investment base should also be based on current costs. Further, the use of market value is based on

the opportunity cost principle. That is, the return we are receiving is based on today’s costs compared to

the return that we could be receiving if the investment base was invested elsewhere.

To illustrate the differences in the investment base, table 14.7 contains the written-down value, orig-

inal cost and market value for the specialty stores division of the Fun Hats Company. The ROI and RI

have been calculated on these values. Recall that the specialty stores division made a divisional margin

of $70 000 and that the company’s desired rate of return when calculating the RI is 15 per cent. The

results show that using the different investment base can alter the performance results quite drastically,

so care must be taken when choosing the investment base.

TABLE  14.7 Effect of differences in investment bases

Value ROI RI

Written-down    value   or   net     book   value $225 000 31.1% $36 250

Original cost or gross book value $250 000 28% $32 500

Market value $300 000 23.3% $25 000

As discussed earlier, the EVA uses long-term assets (total assets less current liabilities) as its invest-

ment base, and adjustments are made depending on the type of entity.

VALUE TO BUSINESS

•   The evaluation of investment centre performance is based on the economic return relative to the

invested resources.

•   Return  on   investment (ROI)   =   Profit/Investment.

•   Du   Point  ROI = Return on sales × Investment  turnover.

•   Residual    income  (RI)    = Profit before tax – (Required rate of return ×    Investment).

•   EVA = Net operating profit after tax – (Cost of capital × Capital).

14.4 Environmental and social performance

LEARNING OBJECTIVE 14.4 Examine the use of environmental and social performance measurement.

The above section highlighted some of the key financial performance measures. This section gives

an overview of some of the typical environmental and social performance measures. As discussed in

chapter 2, the triple bottom line approach to corporate reporting is becoming more widespread and

expected. Further, there is increasing regulation relating to sustainability issues as the velocity of

environmental and social change is increasing, bringing about a questioning of the appropriateness of the

current market and global systems.

In 2001, the United Nations Division for Sustainable Development (UNDSD) published ‘Environ-

mental management accounting procedures and principles’ to help management accountants deal with

the extensive information available on environmental data. In order to assess environmental and social

dimensions there was a need to develop, track and monitor key performance indicators. The UNDSD

relied on ISO 14031 Environmental management — Environmental performance evaluation — Guidelines